Clarifying pollution exclusions
in commercial insurance policies

The Ontario Court of Appeal recently delivered a decision interpreting the pollution exclusion commonly found in commercial general liability (CGL) insurance policies. Such exclusions typically preclude coverage for the insured's liability for the release or escape of pollutants at or from the insured's premises.

In ING Insurance Co. of Canada v. Miracle (c.o.b. Mohawk Imperial Sales), [2011] O.J. No. 1837, the Court of Appeal held the exclusion applied to a liability claim for the escape of gasoline from a service station storage tank. This was opposite in result to its earlier decision in Zurich Insurance Co. v. 686234 Ontario Ltd., [2002] O.J. No. 4496, where it concluded the exclusion did not apply to the escape of carbon monoxide in a high-rise apartment. Why the difference in outcomes on substantially the same wordings?

In Zurich, the insurer provided
CGL coverage to the owner of the
apartment complex. The tenants
sued for bodily injury from breathing
carbon monoxide that inadvertently
leaked into the units from
the building's malfunctioning furnace
system. Zurich cited the pollution
exclusion to decline coverage
and sought a declaration in
support. The lower court dismissed
Zurich's application, concluding
that the exclusion was
only "intended to vitiate coverage
for injuries resulting from pollution
of the natural environment
and not the indoor environment."

The Ontario Court of Appeal
upheld this result, but with
expanded reasoning. Notwithstanding
language that, on its face,
supported broad application of the
pollution exclusion, the court
declined a "hyperliteral" reading in
deference to a "connotative contextual
construction" that drew on
the exclusion's historical roots in
industrial risks. The court concluded
that "to apply an exclusion
intended to bar coverage for claims
arising from environmental pollution
to carbon monoxide poisoning
from a faulty furnace, is to deny the
history of the exclusion, the purpose
of CGL insurance, and the
reasonable expectations of policyholders
in acquiring the insurance."

The court further stated that
"[t]here is nothing in this case to
suggest that the respondent's regular
business activities place it in the
category of an active industrial polluter
of the natural environment."
Effectively, it considered the claim
to be the very type of business tort
that has been and should be covered by CGL insurance policies,
which placed it beyond the traditional
purpose of the pollution
exclusion. The court further confirmed,
"it is necessary to understand
that the exclusion focuses on
the act of pollution, rather than the
resulting personal injury or property
damage."

In the more recent Mohawk case, ING's insured operated a convenience
store and gas bar with
underground storage tanks that
supplied the pumps. The government
of Canada brought an action
for damages caused by gasoline
that escaped from the tanks and
migrated to its adjacent lands. The
claim alleged strict liability, nuisance
and negligence, and sought
the costs of an environmental
assessment and remediation,
together with the loss of land value.

In considering coverage for
Mohawk against the claim, the
lower court took the view that
ING's pollution exclusion did not
apply, as passive leakage of gasoline
from a commercial business as a
consequence of negligence did not
satisfy Zurich's requirement of an
"active industrial polluter."

On appeal, the Ontario Court of
Appeal also relied on Zurich, but to
support a different view of the facts
and law. The court confirmed that
the historical evolution of the pollution
exclusion remained paramount
to its interpretation. Such
exclusions were initially incorporated
into CGL policies as a result of
insurer fears of the growing exposures
of industrial insureds to regulators
and other entities. Thereafter,
variations of the exclusion
proliferated in both insurance and
reinsurance contracts, finding their
way into virtually every CGL policy
issued in Canada and the U.S.

The court also referenced the
nature of the insured's business
activities, together with its reasonable
expectations, as two important
factors in the factual analysis of
such cases. Justice Sharpe, in promoting
a "commercially sensible
interpretation" of the wording,
stated, "I do not accept the argument
that the phrase 'active industrial
polluter of the natural environment'
used in Zurich should be
read as restricting the reach of the
pollution exclusion clause to situations
where the insured is engaged
in an activity that necessarily results
in pollution."

He took the further view that
the clause could not be meant to
be restricted to "active industrial
polluters" as such entities, by
their nature, would not be covered
by ordinary liability insurance
coverage on the basis of the
"fortuity" principle underlying all
insurance products. To limit
application of the exclusion to
such insureds would effectively
strip it of any meaning.

Instead, the court concluded that "the exclusion clearly extends
to activities, such as storing gasoline
in the ground for resale at a gas
bar, that carry a known risk of pollution
and environmental harm." In
doing so, it cited with approval the
statement of Justice Labrosse in
Ontario v. Kansa, [1994] O.J. No.
177, that "the passive polluter who
permits pollution to take place is
just as much a polluter as the active
polluter who discharges or causes
the discharge of pollution." The
result was a reversal of the lower
court's ruling and a declaration of
no coverage in favour of the insurer.

In Mohawk, the court referred
to Zurich as the "starting point for
interpreting the pollution exclusion."
From there, it determined
that the phrase "active industrial
polluter of the natural environment"
as it appears in Zurich should not be given a "hyperliteral"
interpretation itself. Otherwise, the
court would fall into the very interpretational
trap the court in Zurich sought to avoid. Rather, the historical
purpose of the exclusion, along
with a "commercially sensible"
reading of its language, supported
the conclusion that the business of
storing gasoline in underground
tanks for resale entails a sufficient
"known risk of pollution and
environmental harm" to invoke the
exclusion. In contrast, leakage of
carbon monoxide in an apartment
building does not.

Mohawk emphasizes that application
of the pollution exclusion is
deeply dependant on the actual
business activities of the insured.
While both the exclusion's wording
and its historical roots remain relevant
to a coverage analysis, the
ultimate outcome will turn on the
nature of the business that causes
the pollution exposure. In this context,
literal distinctions between
"active industrial" and "passive
commercial" polluters appears to
be irrelevant.

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